Beracha, Hardin & Johnson Buy vs. Rent Index

 

 

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© Copyright owned by Eli Beracha, William G. Hardin and Ken Johnson.

BH&J Buy vs Rent Index Description

The Beracha, Hardin & Johnson Buy vs. Rent Index is an index designed to signal whether current market conditions favor buying or renting a home in terms of wealth creation over a fixed holding period in a particular market relative to historical market conditions and alternative investment opportunities. The index summarizes 23 major metropolitan housing markets and the U.S. real estate market as a whole (represented by the member index metropolitan areas). The member cities overlap to some degree, but not exclusively, to those cities in the S&P Case-Shiller Index. As in the case of Case-Shiller, the BH&J Index experiences a roughly two month data lag due to the delay in data availability and the time necessary to calculate the most current index values.

The values of the BH&J Index can vary between -1 and 1 where any value greater than 0 and less than or equal to 1 indicates that current market conditions favor renting in terms of wealth accumulation and any value less than 0 and greater than or equal to -1 indicates that current market conditions favor buying in terms of wealth accumulation. Negative numbers favor ownership while positive values favor renting. An index value that is further away from 0 is a stronger signal that buying or renting is preferred compared with a value that is closer to 0. By definition, the average index value for each location is 0 while -1 and 1 are each 3 standard deviations away from 0. Said another way, an index value for a particular period and area that approaches -1 strongly favors buying in order to create greater wealth, on average. While an index value that approaches 1 strongly favors renting in terms of wealth creation. Index values close to 0 suggest a “toss-up” between ownership and renting.

In order to arrive at the index value for each location and each point in time, the index conducts a “horse race” comparison between an individual that is buying a home and an individual that rents a similar quality home and reinvests all monies otherwise invested in homeownership. The end results of each comparison are calibrated to yield a value between -1 and 1. The comparison between buying and renting considers many factors including, but not limited to, rent-to-price ratio, mortgage rates, expected rate of inflation, real past stock market long term returns, long term rent growth and housing price appreciation, costs associated with maintenance and property taxes, homeownership tax benefits, transaction costs and average homeowners’ duration between relocations.

The major goal of the BH&J Index is to provide information on the health of housing markets around the country enabling consumers, real estate market professionals, developers, lenders and housing policy makers to make more informed decisions.


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Ken Johnson, Ph.D.
Florida Atlantic University
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